BOGEYMEN DON'T SET OIL AND GAS PRICES

April 6, 1992
A seriously troubled industry must focus its scarce resources and precious energies on real problems and pivotal issues. It cannot afford to behave otherwise. The U.S. oil and gas industry has real problems-problems that are draining the business of its financial and human vitality. Natural gas prices remain below replacement costs. Oil prices remain below expectations. Taxes penalize drilling and production investments. Access to federal land worsens with time. Federal oil and gas

A seriously troubled industry must focus its scarce resources and precious energies on real problems and pivotal issues. It cannot afford to behave otherwise.

The U.S. oil and gas industry has real problems-problems that are draining the business of its financial and human vitality. Natural gas prices remain below replacement costs. Oil prices remain below expectations. Taxes penalize drilling and production investments. Access to federal land worsens with time. Federal oil and gas leasing proves to be a costly shell game.

With problems like these, the industry doesn't need bogeymen. Yet bogeymen seem always to appear when oil and gas prices slump. Fingers of blame point, as a few did last month at the Texas Railroad Commission's state of the industry hearing in Houston, at the Organization of Petroleum Exporting Countries, at futures traders, at U.S. foreign policy, at competitors who cut prices to keep gas flowing.

A reminder, therefore, is in order. Absent government controls, prices drop for one reason: Sellers offer more than buyers want. Bogeymen don't exist; alas, supper excesses and demand deficiencies do.

THE MARKET'S UGLY SIDE

Oil and gas markets don't work perfectly, although they may work better than most. Politics does influence OPEC decision making. Some companies do enjoy cost advantages or special subsidies. Ultimately, however, supply and demand determine oil and gas prices, bumpy though the process may be at times. The law of markets requires only that this be so. It does not decree that supply and demand apportion prosperity evenly among all market participants. This is the ugly side of market efficiency.

The point moves beyond academics when misconceptions about it influence policy. Governments claim markets don't work when they want to control prices. Producers claim markets don't work when they want protection from low prices or from competitors. Yet the only times when markets really don't work is when artificial controls on price, supply, or demand keep them from working. And in due course controls always give way to market pressures.

Now comes Oklahoma's prorationing law. Soon may come similar laws in Texas and Louisiana. The states say they're promoting conservation, a legitimate aim of prorationing. But everyone has heard the pitch: Markets aren't working so states must act to restore prices to healthy levels.

CONSERVATION?

That doesn't sound like conservation to many observers. It doesn't sound like conservation to electric power producers deciding what type of generators to build. It doesn't sound like conservation to key members of the House energy and commerce committee, who last week threatened to retaliate legislatively against producing state prorationing schemes. It doesn't sound like conservation because nobody cared much about conservation before gas prices plunged. If prorationing succeeds in artificially raising prices for a time, there will be consequences: structurally diminished demand at the very least, perhaps new federal price controls.

The oil industry's main problem is not that oil and gas markets don't work. It is that markets sometimes work too well in the wrong direction in a period of political antagonism. Governments can do nothing about supply excesses and demand deficiencies except create distortions and raise costs. Instead of market intrusions, producers should be seeking solutions to problems created by governments, such as punitive taxes, land withdrawals, and deadlocked leases. Especially in an economic slump, mistakes like those are inexcusable.

Copyright 1992 Oil & Gas Journal. All Rights Reserved.